Bernanke: Recession is ‘possible’

WASHINGTON — Federal Reserve Chairman Ben S. Bernanke today conceded that the economy may be in a shallow recession through the first half of the year, while defending the Feds rescue of Bear Stearns last month as a one-time action needed to protect the economy from worse damage.

In what may be his most important testimony to date before the congressional Joint Economic Committee, Mr. Bernanke became the first Fed chairman in decades to acknowledge what nearly every other economist is saying: that an economic contraction likely started in December and will continue through at least June before the economy starts growing again, in what by historic standards would be a mild downturn.

A recession is possible, he said, but he held out hope that the worst of the downturn — particularly the turmoil seen in financial and housing markets — is over. “Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year.”

Mr. Bernanke said the financial and economic distress has particularly taken a toll on consumers, who not only are facing a deteriorating job outlook but have to contend with record high prices for food and fuel that are largely outside the Feds control because they originate from forces overseas.

He said there are no quick fixes that either the Fed or Congress can enact to make the recession go away or to totally alleviate the burden on consumers. The Feds already deep interest rate cuts in January and February take time to work on the economy — usually six months to a year.

Thats the most difficult problem for us, is to deal with those kinds of shocks, he said. He recommended that Congress allow the $168 billion stimulus package with consumer tax rebates enacted in February to take effect this summer and wait until next year before considering more stimulus for the economy.

He said Congress can take constructive steps both by addressing and alleviating the housing crisis and by encouraging research into alternative fuels that eventually can replace the nations overwhelming dependence on expensive imported oil. Meanwhile, he said, consumers and lawmakers alike will simply have to persevere.

We’re in a period where were having to deal with high energy costs while hoping and waiting for alternatives to come available, he said.

Mr. Bernanke said the Feds arrangement of $30 billion of financing for J.P. Morgan to buy Bear Stearns was an unusual action which the Fed was forced to take with only 24 hours notice after being informed on March 13 that the company would have to file for bankruptcy.

He sought to assure Congress that the Fed is not planning any more taxpayer-backed bailouts for Wall Street firms like Bear Stearns. Some other firms, including Lehman Brothers, Morgan Stanley and Citigroup, have encountered some of the same extreme pressures in credit markets that brought Bear Stearns down.

Mr. Bernanke defended the extraordinary Bear Stearns rescue as necessary to preserve the stability of the financial markets and prevent further serious harm to the economy from what would have been a potentially chaotic unwinding of hundreds of billions of credit derivative contracts the Wall Street giant had with other financial companies around the world.

The adverse effects would not have been confined to the financial system but would have had an effect on asset values and would have been felt throughout the economy.

The Fed chairman acknowledged that now that the Fed has thrown open its emergency lending window to Bear Stearns and 19 other international brokers, it should have regulatory powers to oversee their risky lending activities in the future. He said the central bank already has sent examiners to work alongside Securities and Exchange Commission oversight staff at each of the firms.